Tax Law Basics –Deductions 2016 U.S. Income Tax Filing · Necessity to file a return Standard deduction Tax rate bracket Eligibility for certain credits 22 Filing Status –Tax

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2016 U.S. Income

Tax Filing

Gary Koenig, BS CSc, MBA, CCP

Tax Law Basics

● All income is taxable (US or worldwide),

unless the law says it is not

● No deduction is allowed,

unless the law says it is

● No credit is allowed,

unless the law says it is

3

Tax Law Basics – Income

4

Gross Income

Minus adjustments

= Adjusted gross Income (AGI)

Minus deductions and exemptions

= Taxable Income

Tax Law Basics – Deductions

● Reduce income otherwise subject to tax

● Types:

� Adjustments to gross income

� Itemized or standard deduction

� Personal exemption(s)

� 1 – Single, MFS, HoH, QW

� 2 – MFJ

� Dependent exemption(s) (1 per dependent)

5

Tax Law Basics – Credits

● Reduce tax liability dollar for dollar

� Nonrefundable

�Limited to amount of tax owed

�No cash back

� Refundable

�Cash back if exceed tax owed

6

Tax Law Basics – Who Must File

Filing Status Under 65 65 or older (<1/2/1951)

Single $ 10,300 $ 11,850*

Married filing jointly

Both spouses

One spouse 65+

$ 20,600 $ 23,100*

$ 21,850*

Married filing separately $ 4,000 $ 4,000*

Head of Household $ 13,250 $ 14,800*

Qualifying Widow(er) $ 16,600 $ 17,850*

*Excludes Social Security

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Tax Law Basics – Who Must File

● Owe additional taxes

� Form 5329 – IRAs

� Unreported tips – social security / Medicare tax

� First Time Home Buyer Credit repayment

� ACA/Obamacare Payment/Refund� Received Form 1095-A

● $400 or more net self-employment income

● Over $108.28 of wages from a church

8

Tax Law Basics – Who Should File

● Claiming refund of withheld taxes or estimated tax payments

● Claiming any refundable credit(credit independent of taxes owed)

� Earned Income Credit

� Additional Child Tax Credit

� Education Credits

● State return required

● Desire to help prevent identity theft

9

Identity Theft (from prior year(s))

● IRS sends notices to taxpayers identified

as victims (or potential victims)

● Notice provides Identity Protection PIN

victim needs when filing 2015 tax return

� If you received a letter dated 1/4/16 with

PIN for 2014 return, IRS goofed (s/b 2015)

● If received IP PIN but lost it, call ID Theft

Toll-free Hotline: 800-908-4490

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Form 14039

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Tax Return Responsibilities

● Even if you have someone else prepare

your return …

� It’s your return and you are responsible

for accuracy of all data provided

� You must have accurate and complete

records if audited by IRS

14

Details

Line-by

Line

15

2015

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Details

Line-by

Line

16

2015

2015

Tax Law Basics – Form 1040

● Identity, filing status and exemptions

● Income

● Adjustments (to income)

● Deductions and exemptions

● Tax and nonrefundable credits

● Additional taxes

● Refundable credits

17

Form 1040 – Identity & Status

18

15xxxx

Five Choices for Filing Status

● Single 4th

● Married filing jointly (MFJ) Best

● Married filing separately (MFS) Worst

● Head of household (HH) 3rd

● Qualified widow(er) (QW) 2nd

19

Filing Status Determination

● Two criteria:

� Marital status on last day of tax year

�Federal definition – “married”

● Legal marriage under laws of any state or

country

● Does not include civil unions or registered

domestic partners

� Type of dependents, if any

20

Pub 17 Ch 2

Living Situation Analysis

● Marital status as of 12/31

● Others living in home, if any

� Their relationship/dependency

� Who paid upkeep

● If widow(er)

� Date of death of spouse

� Any dependent children at home

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Filing Status Importance

● Many tax items affected by filing status

� Necessity to file a return

� Standard deduction

� Tax rate bracket

� Eligibility for certain credits

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Filing Status – Tax Rate

23

Married Filing Jointly

● Married on last day of year

● Common law marriage

� If recognized in state where started

● Spouse died during current year/not

remarried

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Qualifying Widow(er)

● Spouse died in one of two past years

� Dependent child and/or stepchild lived in

home All year

� Grandchild not eligible

● Maintained home for child

� >50% of cost

● Can file QW for two years only

25

Qualifying Widow(er)

● Advantages

� Standard Deduction – same as MFJ

� Uses MFJ tax rates

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Head of Household – Unmarried

● Provided home* for qualified child

� Might not be a dependent

● Provided home* for related dependent

● >50% cost of maintaining home for

dependent parents living elsewhere

* Paid more than 50% of cost of keeping up the home

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Head of Household – Married

● Lived apart all of last 6 months of year

● Provided home* for:

� Child, stepchild, or eligible foster child

for over six months

● No other relatives qualify

* Paid more than 50% of cost of keeping up the home

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Head of Household – Providing a Home

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Head of Household

● Key advantages

� Higher standard deduction than Single or

MFS

� Advantageous tax rate structure

30

Single

● Not married as of December 31st

● Married, but legally separated

● No dependent children at home

31

Married Filing Separately

● Taxpayer chooses to file MFS

● Spouse has already filed MFS

● Married but separated and not filing MFJ

● Rare cases – more advantageous

� Generally, no children in home

● TX is a community property state,

therefore, this can be messy

32

MFS Disadvantages

● Highest tax rate/lower standard

deduction

● Cannot claim most tax credits

● Cannot deduct student loan interest

● Capital loss limit $1,500 (not $3,000)

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Exemptions

● Reduces taxable income

● Two Types

� Personal exemptions

� Dependent exemptions

�Qualifying child

�Qualifying relative

36

Personal Exemptions

● Widow/er can file MFJ and claim two

personal exemptions in year of spouse’s

death

� If not remarried by 12/31

� If not divorced or legally separated on

date of death

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Dependent Exemption

● Person other than taxpayer or spouse

who entitles taxpayer to exemption:

� Qualifying child (which also includes

disabled adults)

OR

� Qualifying relative (which also includes

qualifying non-relatives)

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Tests to be a Qualifying Child /

Relative

39

Dependency Terms

● Permanently and totally disabled

� Person cannot engage in any substantial

gainful activity because of a physical or

mental condition -AND-

� Doctor determines condition has lasted

or can be expected to last continuously

for at least a year or can lead to death

40

Dependency Terms (cont.)

● Student

� A full-time student during some part of

each of any five calendar months of the

year

� Full-time is the number of hours or

courses the school considers to be full-

time

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Dependency Terms (cont.)

● Student (cont.)

� Attending a school that has a regular

teaching staff, course of study and

student body at the school

� Does NOT include on-the-job training

course, correspondence school, or school

offering courses only through the

Internet

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Multiple Uses of Dependent Info

● Dependent Exemption

● Dependent Care Deduction

● Earned Income Credit

● Child Tax Credit

● Education Credit

● Medical and Tertiary School Expenses

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Form 1040 – Income

44

Taxable Versus Nontaxable Income

● Even though not taxable, must show

certain nontaxable income

� Exempt interest income

� Exempt dividend income

�May affect other calculations

e.g., taxable portion of social security

benefits

45

Earned Versus Unearned Income

● Definition differs – must check rules for particular benefit

● Example:

� For the earned income credit� Earned income does not include taxable

scholarship income

� For the gross income filing requirement of a dependent� Earned income does include taxable

scholarship income

46

Earned Versus Unearned Income

● Other types of unearned income

� Land rents

� Unemployment

� Retirement income

� Social security benefits

(there are more types of unearned

income)

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Interest Income – What Is It?

● Earnings on

� Bank, savings, and credit union deposits

� Certificates of Deposit

� Bonds (corporate or government)

� Money loaned out

48

Interest Income – What Is It?

● It is not earned income

� Money, not a person, is earning the

income

● Reported in year earned

� Usually when posted to account

49

Where to Find Interest Income

● Form 1099-INT

● Brokerage Statement

● Schedule K-1

● No tax form from payer

� Seller financed mortgage interest income

� Private or foreign payer

� Interest less than $10

50

Interest Income

● Whether or not reported by the payer

on a tax form, all interest must be

included in the return

� Taxable

- OR -

� Exempt

� Other calculations can be impacted

51

Interest Income

● All interest is taxable except:

� State or municipal obligations; including

�D.C.

�U.S. possessions

�See Pub 17

● U.S. obligations (T-Bills, Savings Bonds,

etc.) are fully taxable for federal tax

52

Dividend Income – What is it?

● Payment by a corporation

● Paid to its shareholders

● Represents a portion of the

corporation’s earnings

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● Mutual funds “pay” to their investors

� Dividends from the fund’s income

�Dividend income from corporations

� Interest income from bonds/accounts

� Capital gain distributions from capital

transactions that the fund makes

54


● Mutual fund dividends

� Dividend income from corporations

�Will be identified as ordinary/qualified

� Interest income from bonds/accounts

�Will be identified as exempt if from

exempt securities, e.g. state bonds

� But both are still dividends to the fund’s

shareholders

55

Dividend Income

● Ordinary dividend income (not qualified)

� Taxed at regular tax rates

● Qualified dividend income

� A subset of Ordinary Dividends

� Taxed at capital gain rates

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Where to Find Dividend Income

● Form 1099-DIV

● Substitute 1099-DIV (brokerage or

mutual fund statement)

● Schedule K-1

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Dividend Income

● Reinvested dividends

� Really, two transactions

�Dividend income

�Purchase of more shares

� Payer effects both instantaneously

�Payers keep track of basis for covered securities (always taxpayer’s responsibility)

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Alimony Received

What is Alimony?

● Spousal support under separation or divorce instrument

● Usually stops if recipient remarries, may stop sooner

● Not subject to change based on factors such as age of a child

� Child/family support is NOT alimony

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Alimony Received

● Not earned income for

� Earned Income Credit

� Child tax credit

� Dependent care credit

�But IS “compensation” for IRA

Contributions

62

Self-Employment Income

Is it a Business?

There are 3 choices

1. A business

2. Income producing, but not a business

3. Not entered into for profit (e.g. hobby)

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A Business

● Facts and circumstances:

� Profit motive

� Reasonable expectation of profit

� Means of livelihood

� Regular activity

� Conducted in a business-like manner

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Income Producing, Not a Business


� Sporadic activity, e.g., one-time fee

� Gambling winnings

� Investing

� Sale of personal assets (e.g. yard sales,

Craig’s list, etc.)

65

Not Entered Into for Profit


� Model airplane contest

� Beer mug collecting

� Antique hunting, when not a business

● Usually, more pleasure driven than

income driven

66

Self-Employment Notes:

● Taxpayer does not have to conduct

regular full-time business activities to be

self-employed

● Remember – all income is taxable unless

the law says it isn’t!

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What if it is NOT a Business?

● Income goes to Form 1040 line 21 “other”

● Deductible items go on Schedule A

� Usually subject to 2% of AGI (Lines 21 – 23)

� To produce or collect income or

� To manage or maintain income-producing property or

� To determine any tax

68

What if it is NOT a Business?

● In some cases, deductible items go on

Schedule A, but are not subject to 2% of

AGI rule (Line 28)

�Gambling losses and expenses

�Certain other activities

69

Capital Gains / Losses

● What is a capital gain?

� It’s your profit when you sell a capital

asset for more than you have in it

● What is a capital loss?

� It’s your loss when you sell a capital

asset for less than you have in it

71

Capital Gains / Losses

● Ordinary income tax rates range from

10% to 39.6%

● Capital gain tax rates are much lower

� Usually 0% or 15% rate

� Could be 20% rate for very high incomes

72

Capital Gain Distributions

● Capital Gain Distributions represent

share of profit from sale of assets within

mutual fund

� Always long term

� Taxed at capital gain rates

73

Capital Asset Taxation

● Capital gain tax rates apply to “net long-

term gains” and qualified dividends

● Ordinary income rates apply to “net

short-term gains”

● Capital gains or losses come from the

sale* of capital assets

74

*or other reportable event

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When is a Gain/Loss Not Reported

● Not reported if not a “sale or exchange”

� A gift is not sale or exchange

� Donation to charity is not sale or

exchange

� Bequest to heir is not sale or exchange

75

What is a Capital Asset

● Generally, nonbusiness assets

● Securities are capital assets

� Stocks

� Bonds

� Mutual fund shares

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What is NOT a Capital Asset

● Copyright, a literary, musical, or artistic

composition, letter, memo or similar* are not

capital assets

* Held by the creator or letter recipient

77

“Sort-of” Capital Assets

● Homes and other non-investment assets

� Capital assets for gains

� Personal assets for losses

(not deductible)

�Government is a profits-only partner!

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Sale of Principal Residence (“Main Home”)

● Generally not a taxable event if:

� Residence was main home

� Taxpayer satisfies ownership and use

tests

� Gain less than $250,000 ($500,000 MFJ)

� Taxpayer did not receive Form 1099-S

79

What is a Main Home

● Where taxpayer lives most of the time

● Can be houseboat, mobile home, condo or co-op

● Must have cooking, sleeping and bathroom

facilities

● If more than one home, main home is one

taxpayer lives in most of the time

● Taxpayer cannot simply “choose”

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Sale of Main Home

● Report on tax return if

� Any part of gain is taxable

� Any time Form 1099-S is received

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Types of Retirement Income

● Pensions

● Annuities

● Social Security

● Individual Retirement

Arrangement (IRA) Distributions

83

Retirement Income Reported on:

● Form 1099-R – Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans,

IRAs, Insurance Contracts, 401(k) plans etc.

● Form RRB 1099-R – Annuities or Pensions by the

Railroad Retirement Board

● Form CSA 1099-R – Statement of Annuity Paid

(civil service retirement payments)

● Form CSF 1099-R – Statement of Survivor

Annuity Paid

84

“Pension” Distributions

● Reported on Forms

� 1099-R – company plans *

� RRB-1099-R – (green) Railroad Benefit

� CSA-1099-R – civil service, government

* Pension distributions include distributions

from 401(k), 403(b) and 457(b) plans

85

Four Types of IRAs

● Traditional

● Roth

● Savings Incentive Match Plans for

Employees (SIMPLE)

● Simplified Employee Pension (SEP)

86

Pub 17 Chapter 17

IRA Distributions

● Regular

● Required minimum distributions (RMD)

● Trustee to trustee transfer (not taxable)

● Rollover (not taxable if done correctly)

87

Pub 17 Ch 17

Pub 590-B

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Traditional IRA Distributions

● Required Minimum Distribution (RMD)

� Must take required minimum

distribution – age 70½

� Must take by April 1 of year following

� Can avoid two distributions taxed in one

year by taking first in year turn 70½

88

Pub 17 Ch 17

Pub 590-B

Traditional IRA Distributions

● Potential 10% additional tax for

distribution prior to 59½ (“too early”

penalty)

� 25% for SIMPLE distributions within 2

years and prior to 59½

● Exceptions may apply

89

Traditional IRA RMD

● IRA administrator (trustee) optionally calculates RMD and notifies taxpayer of requirement and amount

● Taxpayer responsible to take RMD (either from one account or multiple accounts)

● 50% additional tax for amount not distributed (“too late” penalty)

● Can request waiver of additional tax using Form 5329 Part IX

90

Roth IRA

● Contributions not deductible

● Distributions tax free if conditions met

� Pub 17, last page of chapter 17

� Pub 590-B

91

Qualified Roth IRA Distributions

● No additional tax if:

� Made after the five-year period beginning with first contribution -AND-

� Made on or after age 59½ -OR-

� Disabled -OR-

� Death -OR-

� To pay up to $10,000 of certain qualified first-time homebuyer amounts

92

Other Income

● Income not reported on other lines and

schedules

● Does NOT include rent or royalty income

which are reported on Sch E

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Examples of “Other” Income

● Gambling winnings including lotteries and raffles

● Reported on 1099-MISC, Box 3

● Reported on 1099-MISC, Box 7 (but “not a business”)

● 1099-LTC

● Jury duty pay and Poll Worker Pay (not on W-2)

● Other:

� Prizes and awards

� Medical study subject pay

� Cancellation of credit card debt

94

Pub 17, pg 94

Cancellation of Debt

● Nonbusiness credit card debt

● Taxpayer must be solvent immediately

before debt cancelled

� Value of assets exceeds value of

liabilities

� Not in bankruptcy

95

Cancellation of Debt

● Lenders must issue Form 1099-C if cancel

$600 or more of debt

� Less than $600 must also be reported as

income by taxpayer

● Cancelled debt included on Form 1040,

Line 21

96

Long Term Care Payments

1099-LTC

● LTC Insurance Contracts –

� Generally reimbursements not taxable

� Per diem costs up to an aggregate limit

of $330/day are non-taxable

● Reported to taxpayer on 1099-LTC

● Complete Form 8853, Section C

97

Accelerated Death Benefits

1099-LTC

● Insured has been certified by a physician

as terminally ill

� Fully excludible

● Certified as chronically ill

� Treated the same as paid under a

qualified long-term care insurance

contract

98

Medicaid Waiver Payments

● Paid by state or county

● Paid to caregiver to provide nonmedical

support services to an individual in

caregiver’s home

● Frequently paid to care recipients own

family

99

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Difficulty of Care Payments

● IRS Notice 2014-7

� Treats “qualified Medicaid waiver

payments” as difficulty of care payments

� MUST be excluded from Income

100

Form 1040 – Adjustments

101

Adjustments to Income

● Educator expenses

● Health Savings

Account (HSA)

● Self-employment tax

● Early withdrawal

penalty

● Alimony paid*

● IRA contributions*

● Student loan interest*

● Tuition and Fees

● Jury duty pay given to

employer

* Further Explanations

102

Alimony Paid – Line 31a

● Allowed if paid under Divorce/Separation

Agreement

● Must provide recipient’s Social Security No.

● Recipient must claim as income

● Child Support not deductible

103

IRA Contribution – Line 32

● Age limits

� For traditional IRA – under 70½

� For Roth IRA – no age limit

�Note: Roth IRA contribution is not

deductible and will not show on line 32

104

IRA Deduction – Line 32

● Can contribute lesser of $5,500 ($6,500 if age 50 or over) or taxable compensation

● Taxable compensation

� Wages, tips, bonuses, Sch C income, alimony

� Not interest, dividends, pensions, unemployment, social security

● Taxpayer has until end of filing season to make contribution for current tax year

● Actual amount depends on Taxpayer / spouse retirement plans, modified AGI, age and filing status

105

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Non-Deductible Contributions

● If taxpayer participates in employer’s

plan and AGI is too high

� Some or all of Traditional IRA

contribution may be nondeductible

● Roth IRA contributions

106

Student Loan Interest – Line 33

● Interest paid on qualified student loan for post secondary education expenses

● Qualified Loan:

� Expenses of taxpayer, spouse, or dependent (when loan originated)

� For education expenses paid within reasonable time since loan was opened

� For education provided when student enrolled at least ½ time in degree program

107

Pub 17, Ch 19


● Qualified Loan (cont)

� Loan cannot be from relative

� Taxpayer cannot be filing MFS

� Taxpayer cannot be claimed on someone else’s return

� Loan cannot be from qualified retirement plan

� Taxpayer must be liable on the loan

108


● Maximum $2,500 per year

● Phases out as AGI increases

109

Form 1040 Page 2 – Tax & Credits

110

Nonrefundable

Deductions

● Subtractions from a taxpayer’s adjusted gross income (AGI)

● Reduces amount of income taxed

● Most taxpayers have a choice

� Standard deduction

� Itemizing deductions

● Use type of deduction that results in lower tax

111

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Deductions

● If taxpayer files MFS and spouse

itemizes deductions

� Taxpayer must itemize -OR-

� Take a standard deduction of ZERO

● If taxpayer files MFS with standard

deduction and spouse then files MFS

with itemized deduction, taxpayer must

amend return

112

Standard Deduction

● Fixed reduction of AGI based on:

� Filing status

� Age (65 or older)

� Blindness

� Dependency

● Standard amounts change each year

(indexed for inflation)

113

Blindness

● Totally blind taxpayer

-OR-

● Certified statement from eye doctor that

� Taxpayer cannot see better than 20/200 in the better eye with glasses or contact lenses -OR-

� Field of vision is not more than 20 degrees

114

Possible Itemized Deductions

(Schedule A)

● Medical or dental expenses

● Taxes

● Interest

● Gifts to charity

● Casualty and theft losses

● Miscellaneous expenses – subject to 2%

● Miscellaneous expenses – not subject to 2%

115

Medical Expenses

● Medical expenses include

� Diagnosis, cure, mitigation, treatment, or prevention of disease

� Treatments affecting any part or function of body

� Equipment, supplies, and diagnostic devices

� Premiums for insurance that covers medical care

� Long-term care insurance premiums (limited)

� Transportation/travel to get medical care

116

Medical Expenses

● Not all “medical expenses” qualify

● Examples of not qualified expenses:

� Cosmetic surgery

� Funeral or burial expenses

� Nonprescription drugs (except insulin)

� Weight loss program not prescribed

� Diet food

117

Pub 17 Table 21-1; Pub 502

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Medical Expenses

● Must be paid during tax year by cash or c/c

� Cannot be reimbursed expenses including

expenses claimed for HSA

● Only for taxpayer, spouse, dependents or

individuals that would have been

dependent except for gross income or filing

situation – when paid or when incurred

● 23¢/mile for travel for medical purposes

118

Taxes

● MUST be imposed on taxpayer

� Can’t pay someone else’s taxes and claim

it as a deduction

● MUST be paid in current tax year

120

Taxes

● State and local taxes

� Income tax -OR-

� General sales tax

● Real estate tax (U.S. or foreign)

● Personal property tax based on value

● Foreign income tax (if not claiming a

credit)

121

State and Local Taxes – Line 5

● Income taxes

� Withheld (W-2, 1099-R, etc.)

� Tax Paid for state estimated and prior year payments

� Other local income tax payments?

OR

● General sales taxes

122

Additional Sales Tax

● Any large purchases?

� Motor vehicle (car, motorcycle, motor

home, off-road vehicle, etc.)

� Boat or airplane

� Home, home addition or renovation

�Sales tax must have been separately

stated and paid by taxpayer (not the

contractor)

123

Deductible Taxes

● Line 6 – Real Estate (Property) Taxes

� May be reported by mortgage company on Form 1098

� Not for business

� Not for

� Benefit to property

� Itemized charges for services (such as trash pickup or sewer fees)

� Transfer taxes (or stamp taxes)

� Rent increases due to higher real estate taxes

� Homeowners' association charges

124

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Other Deductible Taxes

● Line 7 – Personal Property Taxes based

on value of personal property only

� If based on weight and value, only value

portion is deductible (boat, vehicles, RVs,

etc.)

● Line 8 – Other Taxes

� Foreign income taxes, if credit not

claimed on Form 1116 (1040 line 47)

125

Deductible Taxes

126

State and

local income taxes

or Sales Tax

Main home

Other realty

e.g. car

Foreign

income tax

Non-Deductible Taxes

● Federal income and excise taxes

● Social Security, Medicare

● Federal Unemployment (FUTA)

● Railroad retirement taxes (RRTA)

● Customs duties

● Federal estate and gift taxes

● Per capita tax

127

Pub 17, Table 22-1

Home Mortgage Interest

● Interest on loan secured by main home or second home

● Mortgage to buy or build home or second home (both limited)

● Home equity loan or line of credit (limited)

● Both taxpayer and lender must intend that loan be repaid

128

Home Mortgage Interest Deductibility

● Mortgages taken out before October 14,

1987 – fully deductible, no limit

● Mortgages after October 13, 1987, to

buy, build, or improve home

� Limited to $1,000,000 total debt (this

plus pre-10/14/87 ) ($500,000 MFS)

129

Home Mortgage Interest Deductibility

● Mortgages post October 13, 1987, not to

buy, build, or improve home limited to

� Debt of $100,000 ($50,000 MFS) and

� Total debt on home does not exceed fair

market value of home when taken out

● $1,000,000 and $100,000 limits apply to

combined mortgages on main home and

second home

130

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● Points

� Paid at loan origination

� If to buy or build main home, deductible

in full

� Otherwise, spread over life of loan

131


● Examples

� Deduct points on purchase, loan #1

� Refinance – points on Refinance are spread over life of new loan (#2)

� Refinance 2nd time–

�Remaining points on loan #2 can be deducted when loan #2 is paid off

�Points on 2nd Refinance (loan #3) are spread over life of loan #3

132


● Qualified home mortgage insurance

premium (called PMI)

� Must relate to home acquisition debt

� Insurance contract issued after 2006

� Sometimes not reported on Form 1098

133

Interest

● Home Mortgage

� Line 10 – Interest/Points from Form 1098

� Line 11 – Interest if not on Form 1098

� Line 12 – Points not on Form 1098

� Line 13 – Qualified mortgage Insurance premium

● Line 14 – Investment interest

134

Pub 17 fig 23A & 23B

Deductible Interest Expense

135

Interest and points on 1098

Interest not on 1098

Points not on 1098

PMI

Non-Deductible

● Personal interest (e.g. car loan, line-of-credit)

● Service charges

● Annual fees for credit cards

● Loan fees

● Credit investigation fees

● Interest to purchase or carry tax-exempt securities

● Fines and penalties paid to a government for violations of law

136

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Gifts to Charity

● Qualified charity

� Churches, governments, schools, etc.

� Approved by IRS

�U.S. charity

� irs.gov/charities for list

� Limited to % of AGI

�Public charity: <50% of AGI

� Private foundations: <20% or 30% of AGI

NTTC Training – TY2015137

Gifts to Charity

● Monetary contribution less than $250

� Bank record (check, credit card or bank

statement) or receipt

-OR-

� Written acknowledgement from charity

● If payment is >$75, charity must state

value of goods/services provided, if any


Gifts to Charity

● Monetary contribution $250 or more


� Must state value of goods or services

provided in exchange for contribution, if

any

e.g., fundraising dinner – value of dinner

must be deducted from ticket price paid;

only net amount deductible


Gifts to Charity

● Housing foreign exchange student

� May deduct up to $50 per month

● Foster child unreimbursed expenses

140

Pub 17, Chapter 24

Gifts to Charity

● Donations of clothing or household items

� Deduct fair market value

�Usually thrift store value

� Good used condition or better

● Capital gain or business property donations

● Car, boat, or plane donations

● Total charitable gifts <50% of AGI

141

Gifts to Charity

● Out-of-pocket expenses are also deductible

� Mileage @ 14¢/mi

� Tolls and parking

� Out of pocket expenses when serving as

volunteer for qualified charity (e.g., hospital

volunteer uniform)

● Need written acknowledgement from

charity if any single item is >$250

142

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Non-Cash Contributions

● Need receipt for all non-cash donations

● Single non-cash gifts $250 or more


● More than $500

� Complete Form 8283 – Section A, Part 1 only

● Should always keep detailed list of items

donated (pictures help)

143

Non-Cash Contributions (cont.)

● Generally report by donation date,

specify date

● Taxpayer provides fair market value and

other needed information

144


● Contributions to following types of organizations:

� Business organizations such as Chamber of Commerce

� Civic leagues and associations

� Political organizations and candidates

� Social clubs

� Foreign organizations

� Homeowners’ associations

� Communist organizations

145


● Cost of raffle, bingo, or lottery tickets

● Tuition

● Value of person’s time or service

● Donated blood

● Direct contributions to an individual

● Part of contribution that benefits taxpayer

146

Miscellaneous Deductions

● Subject to 2% of AGI threshold

� Line 21 – Unreimbursed employee

expenses

�Uniforms, job hunting, union dues, etc.

�Use 2106-EZ for mileage and travel

� Line 22 – Tax preparation fees

147

Pub 17 Ch 26

Miscellaneous Deductions (cont.)

● Subject to 2% of AGI threshold (cont)

� Line 23 – Other expenses, examples

� Investment fees

�Safe deposit box (if holds investments)

� IRA trustee fee (if paid from outside funds)

�Repayments of previously claimed income

�Cost to produce or collect taxable income

148

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Miscellaneous Deductions (cont.)

● Cost to produce or collect taxable income,

example: legal fees to obtain social security

benefits (e.g. survivor benefits)

� Deductible to the extent the income is

taxable

� If 85% of SS benefit is taxable, 85% of legal

fee is deductible

� If none of SS benefit is taxable, none of the

legal fee is deductible

149

Miscellaneous Not Subject to 2%

● Gambling losses to extent of winnings

● Unrecovered investment in annuity

● Certain work-related expenses for disabled

● Repayments of income >$3,000 under

claim of right

● Certain Ponzi scheme losses

● Certain casualties

150

Review Your Deductions

● Review to ensure all deductions

considered

● Review documents to ensure all

deductions are correct

● Compare to prior year’s deductions

● Review Schedule A – is it as expected?

● Keep records & receipts w/ tax return

152

Form 1040 – Taxes & Payments

153

Refundable

Dependent Care Expenses:

● Care was for a qualifying person who lived with taxpayer more than half the year

● Taxpayer must pay expenses so that taxpayer and spouse can work or look for work

● Expenses paid for care—not education

● Both taxpayer and spouse (if MFJ) must have earned income (unless spouse is disabled or a full-time student)

● Cannot file MFS (with some exceptions)

154

Qualifying Person?

● Qualifying child who is taxpayer’s dependent and under age 13 -OR-

● Qualifying person incapable of self-care

� Spouse

� Qualifying child

� Dependent

� Someone who would have been taxpayer’s dependent except that...

155

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Dependent except that...

... He or she filed MFJ -OR-

... He or she had gross income over

exemption amount -OR-

... Taxpayer could be claimed as a

dependent

156

Qualifying Child Chart:

157

Qualifying Relative Chart

158

Child of Divorced...Parents

Must live with taxpayer half the year, so

credit goes to custodial parent (if s/he

paid the expense)

159

Paid for Care—Not Education

● Below kindergarten

● After school

● Day camp okay, overnight camp not

● Adult day care okay

● In-home care okay

160

Who is the Caregiver?

● Cannot be spouse or dependent

● Cannot be taxpayer’s child who is under 19

● Cannot be child’s parent (with some exceptions for disabled adults)

● Must show provider’s name, address and identifying number

161

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How Much is the Credit?

● 20% – 35% of amount spent

● Percent is based on AGI

● Maximum amount spent

� $3,000 for one person

� $6,000 for two or more

� Lesser of taxpayer’s or spouse’s earned

income

162

Many Different Education Benefits

● Congress has passed many different laws

giving tax benefits for education.

● Sometimes different benefits use the

same words but have different

definitions for them.

163

Many Different Benefits

● Scholarships & Grants

● American Opportunity Credit

● Lifetime Learning Credit

● Student Loan Interest Adjustment

● Tuition & Fees Adjustment

● Education Savings Account

164

Many Different Benefits (cont.)

● Qualified Tuition Program

● Ed Savings Bond Program

● Employer Provided Education Assistance

● Business deduction Work Related

Educational Expenses

165

Common Definitions

● “Qualified educational institution”

� ALWAYS means any accredited public,

nonprofit, or private post-secondary

institution eligible to participate in Dept.

of Education student aid program

�College or university

�Technical, trade or vocational school

� See http://ope.ed.gov/accreditation

166

Common Definitions

● “Candidate for a degree”

� ALWAYS includes anyone working

toward a degree, certificate or

recognized credential (e.g. cosmetology

license, commercial drivers license)

� Sometimes includes primary or

secondary school student

167

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Common Definitions

● “Qualifying Expenses”

� ALWAYS includes tuition and fees that

must be paid to the school as a

condition of enrollment

� Sometimes includes other expenses

168

Non-Qualifying Educational Expenses

● Insurance

● Medical expenses (including student

health fees)

● Room and board

● Transportation or similar personal, living

or family expenses

169

Grants and Scholarships

● Taxable

� If spent on non-qualifying expenses, OR

� Student is not a candidate for a degree*

● Student determines which monies are

spent for which expenses. More on this

later.

*Degree always includes certificate or other credential

170

Education Credits

● Two Credits

� American Opportunity—designed to

cover first four years of college

� Lifetime Learning—designed to cover the

rest of your life

171

Rules for Both Credits

● Student must be taxpayer, spouse, or

dependent.

● Student must not be claimed as

dependent on another return.

� If student can be claimed as a dependent

but isn’t, s/he can take credit

● Student must be enrolled at eligible

post-secondary school.

172

Rules for Both Credits

● Taxpayer cannot file “Married Filing

Separate.”

● Taxpayer cannot treat spouse as

nonresident alien.

● Taxpayer’s AGI must be below limit for

filing status.

173

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Qualified Expenses

● Tuition and certain related expenses

required for enrollment or attendance

● Student activity fees paid to institution

as condition of enrollment or

attendance

● Expenses paid in 2015 for academic

period beginning 2015 or first 3 months

of 2016

174

Qualified Expenses

● If student is dependent, expenses paid

by student are considered paid by

taxpayer.

● Costs paid by 3rd party, treated as paid

by student.

175

American Opportunities Credit

● Credit worth up to $2,500 per student

� 100% of first $2,000 of expenses

� 25% of second $2,000 of expenses

� Generally 40% refundable

176


● Can be taken only four tax years

● First four years of academic credit after

high school

● Student is a candidate for a degree*

● Minimum of half-time workload as set

by school

*Includes certificate or other credential

177


● No felony drug convictions

● Phased out for AGI greater then $80,000

($160,000 if MFJ)

● Includes tuition and course material

� Computer if required by course/school

178

Lifetime Learning Credit

● Credit worth up to $2,000 per RETURN

� 20% of first $10,000 of expenses

� Not a refundable credit

● No limit on number of years

● Not required to pursue a degree

� If not toward a degree, must be to

acquire or improve job skills

179

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Lifetime Learning Credit

● No minimum amount of course

workload

● Felony drug conviction not disqualifier

● Includes tuition and fees only

(books only if MUST be purchased from

school as a condition of enrollment)

180

Foreign Tax Credit

● Simplified foreign tax credit method

� Foreign tax must be from 1099-DIV,

1099-INT or K-1* ONLY (all others

disqualify)

AND

� Total foreign tax is ≤ $300 ($600 MFJ)

● If not, cannot use simplified method

181

* K-1: tax relating to passive income only (interest or dividends)

Foreign Tax Deduction

Too much foreign tax to use simplified method?

�May claim an itemized deduction for all the foreign income taxes (cannot split)

● Input amount on Sch A, Line 8

� Describe as Foreign Tax

● No benefit if not itemizing

● Benefit of deduction is less than of credit!

182

Two Child Tax Credits

#1: Child Tax Credit

� Up to $1,000 per qualifying child

� Nonrefundable

�Limited to amount of tax owed

#2: Additional Child Tax Credit

� Refundable

�15% of earned income over $3,000

�Up to unused portion of child tax credit

183

Qualifying Child

● Must be a dependent:

� A qualifying child

� NOT a qualifying relative

● Under age 17

● U.S. citizen, national or resident alien

184

Child of Divorced...Parents

● Must be a dependent, so CTC goes with

dependency to noncustodial parent

● See also Form 8332

185

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Other Non-Refundable Credits

● Retirement Savings Credit

● Nonbusiness Energy Property Credit

● Credit for the Elderly or Disabled

�Nonrefundable – offset income tax only,

no cash back

186

Retirement Savings Credit

● Made (or plans to make) contribution to a

retirement account

● May not show on any tax document

● “Other” may include myRA contributions

� Eligible for retirement savings credit

� Can designate tax refund as a contribution

187

Elderly or Disabled Credit

● Taxpayer is 65 or over, or retired on disability pension

● Income limits

� Max $30,500 Single & MFS,

$61,000 MFJ, $45,750 HH

● Schedule R

� Must enter any nontaxable income not entered on the 1040 on Sch R, pg 2

188

Other Taxes

● Self-employment tax

● Social security and Medicare taxes on tip income

● Additional taxes on IRAs and other qualified retirement plans

● Repayment of first-time homebuyer credit

● SRP for health insurance

�Not reduced by nonrefundable credits

189

Self-employment Tax

● A tax in addition to the income tax

● Composed of two elements

� Social security

� Medicare

190

Self-employment Tax

● Applies if net income from self-

employment is $400 or more

● Does not apply to a Notary Public

● Does not apply to statutory employee

(already withheld on W-2)

● Special rules for ministers or church

workers

191

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Self-employment Tax

Social Security portion 6.20%

+ Medicare portion 1.45%

= 7.65%

x 2 = 15.30%

Both employer and employee portions

paid by self-employed person

192

Additional Tax on IRAs, etc.

Form 5329

● Distributions before 59½ not rolled-over

(“early distribution”) (Pt I) – 10%*

additional tax

● Required Minimum Distribution (RMD)

not taken after 70½ (Pt IX) – 50%

additional tax

�There are exceptions

* 25% for SIMPLE IRAs

193

Part IX: Waiver Request for

Failure to Take RMD

● Taxpayer can request waiver of the

additional tax for failure to take

Required Minimum Distribution (RMD)

from qualified retirement plan, including

traditional IRAs

194

Part IX: Waiver Request for

Failure to Take RMD

● Taxpayer needs to remedy the

distribution shortfall by taking an

additional distribution

� Will result in more than one year’s

distribution in the year of remedy

● Then ask for waiver

195

Part IX of Form 5329 pg 2

● Possible explanations (examples):

� Clerical error (math goof)

� Relied on Trustee who failed to make the

RMD

� TP impaired by health

� Beneficiary not notified by Trustee that

RMD had not been taken

�IRS accepts most reasonable explanations196

Types of Payments

● Federal income tax withheld

● Estimated payments

● Amounts applied from prior year

● Earned income credit

● Additional child tax credit (Form 8812)

● American opportunity credit (Form 8863)

● Premium tax credit (Form 8962)

● Payments made with request for extension

● Excess social security or tier 1 RRTA tax withheld

197

1040 page 2

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Form 1040, Page 2

198

Withholding Sources

● Employment

● Social Security

● Pensions, IRA distributions

● Capital gains, interest, dividends

● Unemployment compensation

● Gambling winnings

● W-2

● SSA 1099, RRB 1099

● 1099-R, RRB 1099-R

● Broker Statement

● 1099-INT, 1099-DIV

● 1099-G

● W-2G

199

Estimated Payments

● Typically made if:

� Self-employed

� Investment income

� Projected balance due >$1,000 (to avoid

penalty)

● Payments made periodically by taxpayer

200

Refundable Credit

● A refundable credit is one that can

generate a refund even if the taxpayer

didn’t pay any money in during the tax

year

201

Earned Income Credit Created in 1976

● As part of welfare reform

● To keep the working poor off welfare

● To qualify:

� Must be working

� Must be “poor”

202

Amount of the EIC Credit

203

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Refund/Balance Due

● Taxpayer has several choices on how to

receive refund or pay amount owed

204

Refund or Payment?

205

Refund Options

● Receive refund by check – no action needed

● Direct Deposit

� One account -OR-

� Add Form 8888 for split refund

� Up to three different accounts

� Can receive a portion in a check

� Can purchase US Series I Savings Bond

● Apply some or all to next year’s tax

206

Direct Deposits

● Use Direct Deposit

� Faster (1-2 weeks versus 3+ weeks by

mail)

� Safer

● For checking account, get routing

number and account number from

bottom of check

207

Direct Deposits

● IRS will send refund to savings account, but

its routing transit number is often not easy

to locate

● Direct deposit of refund may only go to

account (or accounts) in taxpayer’s name

● Financial institutions may not allow joint

refund to be deposited into an individual

account

208

Payment Due Options

● Due by April 15 (or later if extended due to weekends or holidays; 2016 – April 18)

1. Check or money order mailed with Form 1040-V, Payment Voucher

2. Electronic funds transfer (ACH)

3. IRS Direct Pay

4. Credit card (may have additional fee)

5. Electronic Federal Tax Payment System (EFTPS)

209

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Line 77 Estimated Tax Penalty

● If tax owed is $1,000 or more AND

● Withholding and estimated payments

less than the smaller of:

� 90% of tax shown on current tax return

OR

� 100% of tax shown on 2014 tax return

�Possible penalty may be due

210

Estimated Payments for 2016

● Taxpayer owes more taxes for 2015 than amount withheld or paid via credits

AND

● Taxpayer expects to owe more than $1,000 for next year after subtracting tax withheld and credits

AND

● Taxpayer expects 2016 tax withholding and credits to be less than 90% of the tax on 2015 return

211

Amending a Return – Why?

● Something not correctly reported on

original return

� New/updated information received by

taxpayer

� Should or could have used a different

filing status

� Mistakes

� Omissions

212

For example…

● Received another (or corrected) income statement not reported on original return (W-2, 1099, ...)

● Claimed personal exemption deduction when someone else was entitled to claim it

● Claimed deductions or credits that should not have been claimed

● Did not claim deductions or credits that should have been claimed

213

Filing Status Change

● Couples who previously filed MFS, HH,

Single, or QW may amend and file MFJ

� Up to three prior year returns

� Must have been legally married as of

December 31 of the respective tax year

● Couples may NOT file MFS if they

originally filed MFJ

214

Do Not Amend a Return

● Math errors – IRS will correct them

● IRS notifies taxpayer to provide missing

schedules/forms – taxpayer should

respond as per notice

215

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Amended Returns

● Essentially, Form 1040X will be the

taxpayer’s new tax return, changing their

original return to include new information

● Whatever was last filed* is starting point

� Even if refund claimed has not yet been

received

� Even if balance due has not yet been paid

* or as last determined (e.g., IRS made adjustment)

216

Amended Returns Statute of Limitations

● Time within which to claim a refund

� Later of:

�3 years from original due date or actual

date filed if later

�2 years from date the tax was paid

217

Amended Returns Statute of Limitations

● Additional tax owing

� IRS barred by Statute of Limitation from

assessing more tax

�3 years from original due date or date

filed if later

�Longer if fraud involved

� Can always voluntarily amend and pay

more tax

218

Amending 2015 Return

● Example:

� Filed 2015 return, say in February 2016

� Receive corrected 1099 in March 2016

● Wait until the IRS processes original

(efiled) return before submitting an

amended return

� Usually, 4 weeks is enough time to wait

219

Part III, Explanation of Changes

● Identify why changes are being made (in a concise and easy to understand way)

� “Received another W-2 after original return filed”

� “Changed filing status to Head of Household”

● Identify each changed item

● No need to say that tax liability was changed as result of other changes

220

Printing Amended Return

● Print 1040X and any form or schedule that

changed (two copies)

� If changed itemized deductions: print Sch A

� If changed business income: print Sch C

� If changed education credit: print 8863

� And so on

● Do not include new 1040

221

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Filing Amended Return

● Must be mailed – find IRS address on Page 5 (“Where to File”) of 1040X instructions

● No cover letter required

● Taxpayer (and spouse if MFJ) must sign and date copy to be mailed

● Keep an exact duplicate copy for your records

222

Amended 2015 Return

● If balance due:

� Taxpayer should file 1040X by April 15 or

as soon as possible thereafter with

payment to reduce interest charges, if

any

� IRS will send a bill for interest

223

New Provisions

● IRS is assigning IP Pins to dependents

● Taxpayer will be able to designate a

contribution to a myRA on Form 1040

● Mandatory exclusion of qualified

Medicaid waiver payments for difficulty

of care services

224

Indexing – Standard Mileage

● 57.5¢ per mile – business miles

● 23¢ per mile – medical miles

● 14¢ per mile – charitable miles

225

Indexing – Deductible Long-Term

Care Premium Limits

● Qualified long-term care premiums

includible as medical expense on Sch A

� $380 – Age 40 or under

� $710 – Age 41 to 50

� $1,430 – Age 51 to 60

� $3,800 – Age 61 to 70

� $4,750 – Age 71 and over

226

Due Dates

● 2015 tax returns are due

� Monday, April 18, 2016

● 2016 estimated payments due

� April 18, 2016*

� June 15, 2016

� September 15, 2016

� January 17, 2017

227

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Record Keeping

● Basic record keeping requirements

� Taxpayer should keep copy of all records

used to file tax return

�Three years from date return was filed

�Two years from date tax was paid

� See Pub 17 for additional requirements

228

Tax Return Preparation

● Verify and clarify information which appears to have changed from last year’s tax return

● Verify you have all needed documents by comparing to last year’s documents

● Verify accuracy of documents and receipts (e.g. correct year)

229

Quality Review Your Return

● Look for typos, transposed digits,

missing information, misspellings, etc.

● If not using tax software, check your

math

● Does the return look similar to last year

and does it have similar results?

● Did you do anything new this year that

you didn’t include?

230

Quality Review Your Return

● Verify adjustments

● Verify deductions (Schedule A)

● Verify credits – including required forms

● Verify correct entry of withholding and any

estimated payments

● Verify direct deposit information

� Bank routing number and account number

231

AARP Foundation Tax-Aide

● Nationwide non-profit program administered by AARP Foundation

● Helps low-to-moderate income taxpayers with special attention to age 60+

● Free confidential service

● Committed to high-quality service

● Answers tax questions/prepares returns

● Funding from AARP Foundation and IRS

232

Documents

Tax Law Basics –Deductions 2016 U.S. Income Tax Filing · Necessity to file a return Standard deduction Tax rate bracket Eligibility for certain credits 22 Filing Status –Tax